Democracy Prep Charter School

Report: Catalytic First-Loss Capital

Civic Builders aims to provide affordable charter school real estate, and it has done this by providing protection to more senior investors investing in dozens of schools nationwide.


Civic Builders (Civic).


The Low Income Investment Fund (LIIF), a community development finance institution.

Amount and Instrument

USD 300,000 as grant provided by Civic (originally from U.S. Department of Education (USED) credit enhancement facility) as first-loss and USD 1,435,146 as equity from Civic as second-loss.

Structure and Terms

In 2008, Civic received a USD 8.3 million USED grant dedicated to providing credit enhancement for Civic’s charter school capital projects. Civic uses this money, in conjunction with its own equity investments, in projects it supports. For this transaction it used USD 300,000 from the USED grant and invested an additional USD 1,435,146 of its own capital as equity. Thus, from Civic’s perspective, the grant protects its equity stake, and from LIIF’s perspective, it’s protected by both the grant and equity—so a total of USD 1,735,146. If not used, the credit enhancement funds are released and returned to Civic’s pool of credit enhancement to re-deploy on other projects. The equity served as predevelopment risk capital, or capital that was invested in the project well before any other project capital was secured and funded.



Civic’s goal was to help its charter school partner create “an inspiring yet affordable” space where its students could learn. It continues to partner with the school by maintaining the below-market rent rate and supporting the school with facility-related issues. For LIIF, Civic’s equity in the form of predevelopment risk capital, as well as its development expertise, helped it become comfortable with the project’s risk. Civic’s real estate experience and understanding of the components of charter school success (Civic has deep relationships with many charter schools) gave LIIF confidence that their investment would be used as efficiently and effectively as possible. Last, but not least, the fact that Civic owns the building and that the lease to the school has performance covenants provided further comfort to LIIF.


In addition to Civic’s philanthropic equity and the credit enhancement, the school itself received a usd 363,220 New York State Stimulus Fund grant for general operating expenses, which increased its financial appeal. Weighing the school’s academic and financial record, as well as its business structure sustainability, Civic calculated an affordability metric, or a set of ratios, the school needed to meet to be financially viable with strong credit for a lender to provide debt. Factors included operating expenses, cost of real estate, debt service coverage ratios, and liquidity requirements. Based upon this affordability metric, it developed the appropriate scope of work and sourced an adequate capital structure comprised of Civic’s equity and LIIF debt.

The negotiations between LIIF and Civic were straightforward. In general, Civic raises capital at a portfolio level on an ongoing basis and invests the capital as needed into individual school projects. These grant funds are distributed over time through the refinancing process and lead to Civic’s organizational sustainability while attracting debt investors to its projects. LIIF was excited and motivated by Civic’s capital contribution.



Completion Date


Geographic Focus

Harlem, New York City, U.S.

Impact Focus

Support a high-quality charter school by transforming a dilapidated church vestry into an appropriate facility for students and teachers while ensuring the affordability and sustainability of a permanent school facility

Investment Size

USD 5,147,040

Investment Capitalization

New Markets Tax Credits (NMTC) debt; equity; credit enhancement grant

Target Return

Civic Builders recycles equity for its projects over time, so its primary goal was to ensure the rent rate was ideally aligned with the school’s budget, not a targeted rate of return. LIIF expected a discounted return commensurate with typical NMTC returns.


100% of Democracy Prep Charter School’s scholars are African-American or Latino; more than 81% are eligible for free or reduced lunch (which is an indicator of their socioeconomic status); 24% enter with special needs, 12% enter as English Language Learners, and nearly 5% are in New York City’s homeless system. The project created 25,500 square feet of school serving approximately 350 students across grades 6-8. Civic has not had a default or delinquency on any assets.

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